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Captive Insurance Companies And Domiciles

A captive insurance company is generally described as an insurance company formed by an industrial or commercial company primarily to insure some or all of the risks of its parent or associated companies. Like any other company, the captive insurance company will be capitalised, have Directors and will employ managers who carry out the day to day running of the company.

These Are Some of The Benefits Of Using A Captive Insurance Company

Capture underwriting profits. Conventional insurers aim to make an underwriting profit, it makes sense for insured companies to retain the underwriting profits made in the years of normal losses themselves by writing the insurance in their captive, and protecting the captive against a catastrophe through reinsurance. By using a captive, a company will not be penalised if the industry pricing is influenced by the poor claims record of others in the industry. Where companies have a better than average loss experience, their premium costs will reflect this.

Smoothing the cost of premiums. It is well known that premiums in the conventional market follow a cyclical pattern leading to budgeting and cashflow problems. A captive allows companies to decide at what level they wish to participate in the conventional insurance market and hence what level of premium to pay for risk transfer.

Niche products underwriting. The conventional market may not meet the needs of the parent company: often the underwriter will not or cannot offer the cover required. In this case the captive may be able to offer the cover, buying reinsurance to protect itself against a catastrophe.

Contingency reserves. These can be built up in a captive which will protect it against a higher than expected level of claims, or offer cover to the parent company against losses that may be low frequency but high severity, or offer cover that would not otherwise be available in the market. Being located in a low tax jurisdiction, certain tax benefits may be achieved.

Access to the reinsurance market. Often known as the "wholesale market", this market offers cover to insurance companies and as such tends to have lower overheads, such as marketing related costs. As a result it can often offer lower terms than the conventional market, and will sometimes pay commissions back to a captive for producing the business.

Risk Management Focus. Information focus, risk retention, relating operating companies premiums to their own loss experience: the captive may have a role in these and other areas.

When should you consider a captive or a captive management company?

It is difficult to define simply when a company should consider forming a captive, as every company and their needs are unique. In general terms companies which benefit from captive insurance tend to have common features. These include companies with:

• profitable net premium income exceeding £500,000;
• a Risk Management focus;
• loss history which is better than others in the same industry;
• low frequency, high severity risks and/or those that are suitable for excess of loss reinsurance, (lower levels of risk could be retained in the captive);

Captive Domiciles

There are many places around the world where the economic environment is welcoming and conductive to the specific area of captive insurance. Whether you are looking to set up your own captive management company or are simply looking for a management company to manage your insurance risk these domiciles are the places to look. I'm sure most of the names will be familiar to those who have dealings with the offshore finance sector, some of the most well established captive domiciles include the the Isle of Man, Jersey, Guernsey, Bermuda, Hawaii and Cayman. Depending on whether you are besed in Europe, the United Kingdom or the US one of these areas should be able to provide a service that will meet your captive insurance needs.